What Is a Charge-Off Debt?

A charge-off debt can reek havoc on a debtor's life in many ways. Creditors can charge-off a debtor's account and damage a debtor's credit score for failure to pay. Charge-offs can make it difficult for a debtor to purchase a home or car, to gain personal credit, or even to get a job. Even if a debtor is able to obtain a loan, the loan will be at a higher interest rate, possibly costing the debtor thousands of dollars in interest over the term of the loan.

Facts

Charge-off debt is a term used by creditors to reconcile their accounting balance sheets. When creditors are unable to collect on a debt for a period of time, generally 6 months, they will write off the debt. To the creditor, the write-off is an expected cost of doing business. To the debtor, a charge-off appears on their credit report and lowers credit scores making it difficult to obtain loans.

Significance

Many times, when debtors see that an account was charged off by a creditor, they falsely believe it means the debt no longer exists. The debt does exist, and most times, just changes hands from your original creditor to a debt collection agency. In many instances, the same debt is reported twice: once as a charge-off by the original creditor and again by the debt collector as a collections account. A debtor can request the credit bureaus remove one of the duplicate accounts. The credit bureau will investigate the request and has 30 days to either remove or provide an explanation as to why it cannot be removed.

Time Frame

While original creditors usually attempt to collect payment for 6 months before writing off the debt, the charge-off remains on a debtor's credit report for 7 years. Once the original creditor passes the debt onto a debt collection agency to collect, the debt collector can contact the debtor until the debt is paid. Of course, the collection agency must follow all federal laws when attempting to collect a debt. A copy of the Fair Debt Collection Practices can be found on FTC.gov (see References). A debtor also needs to be aware of the statute of limitations for filing a lawsuit on an unpaid account. In most states, the statute of limitations is between 3 and 6 years, which means the creditor has until the expiration of the statute of limitations to file a lawsuit. Collectors will determine whether an account is worth filing suit depending on the amount owed, whether your state permits garnishment of wages and whether a debtor has adequate assets. Make sure to contact a consumer law attorney to get legal advice on your particular state's statute of limitations.

Effects

A charge-off can cost a debtor a great deal in the way of getting higher interest rates, being turned down for a job or not being able to purchase a home or car or to finance his child's education. In some cases, debtors may be able to obtain a home mortgage under the condition that the debt is paid off. Credit card companies and car lenders may extend credit to the debtor with a charge-off but at a higher interest rate than those with good credit.

Expert Insight

If a debtor chooses to pay off the debt, it is important that the pay-off terms be in writing. Settling the old debt may, in fact, cause harm to a debtor's credit score, so it is best to negotiate with the creditor that if the debt is paid in full, the negative information will be removed.